SEC roundtable explores short-termism and the role of periodic reporting
—U.S. Securities and Exchange Commission Chairman Jay Clayton1
Continuing its probe into the relationship between the current disclosure framework and issuers’ ability to focus on long-term value creation, the U.S. Securities and Exchange Commission (SEC) Division of Corporation Finance hosted a roundtable discussion on July 18, 2019, with panelists representing issuers, asset managers, law firms, auditors, stock markets, academia, and other corporate governance stakeholders.2 The roundtable served as a complement to the SEC’s “Request for Comment on Earnings Releases and Quarterly Reports,” which remains open for submissions.
SEC Chairman Jay Clayton framed the conversation around how the existing regulatory framework impacts liquidity choices (public vs. private) and corporate focus (long term vs. short term). SEC Commissioner Elad Roisman reinforced the need to ensure that public equity markets are working for retail investors with long-term outlooks.
Roundtable panelists addressed the following two questions:
1. Do U.S. capital markets have an excessive focus on the short term?
2. Should the SEC modify rules pertaining to the periodic reporting system?
There was a consensus among participants during the second panel that improvements could be made to the Form 10-Q, although views of its inherent value varied. As a point of reference, only 10 percent of respondents to a survey conducted by the Society for Corporate Governance said the current quarterly reporting process was not “complex and burdensome.”6
Because quarterly earnings releases are often published before the Form 10-Q and contain much of the same information, panelists representing issuers suggested the earnings release could be used in conjunction with the Form 10-Q to satisfy disclosure requirements and reduce the time and cost burdens associated with preparing the Form 10-Q. Others supported exploring the option to allow semiannual reporting for some categories of companies.
Investor representatives were reluctant to call for any decrease in the frequency or rigor of the existing reporting model, but they did express concern that the use of earnings guidance incentivizes management to adopt a short-term focus. Several participants requested the SEC discourage the use of quarterly earnings guidance—or at least reinforce that the SEC does not require it—while others doubted whether the SEC has the authority or desire to impede the issuance of guidance.
Nicolas Grabar, partner at Cleary Gottlieb Steen & Hamilton, summarized the panel’s suggestions to the SEC for streamlining the Form 10-Q:
It remains to be seen what, if any, action the SEC will take on the panelists’ suggestions and the responses to its request for comment. To submit a comment to the SEC on this topic, visit the SEC site here.
1 U.S. Securities and Exchange Commission Chairman Jay Clayton, “Statement at the SEC Staff Roundtable on Short-Term/Long-Term Management of Public Companies, Our Periodic Reporting System and Regulatory Requirements,” [public statement] July 18, 2019.
2 SEC webcast archive, July 18, 2019, accessed July 31, 2019.
3 Editorial Board, “Where Have All the Public Companies Gone?” Bloomberg Opinion (April 9, 2018).
4 Research suggests this sharp drop in public companies may also be attributed to the decline in the number of initial public offerings specifically by micro-cap companies after the burst of the tech bubble. See James J. Rowley Jr. and Haifeng Wang, PhD, “What’s behind the falling number of public companies?” Vanguard Research, November 2017.
5 John R. Graham, Campbell R. Harvey, and Shivaram Rajgopal, “The Economic Implications of Corporate Financial Reporting,” (January 11, 2005), p. 16.
6 Society for Corporate Governance, “Request for Comment on Earnings Releases and Quarterly Reports--File Number S7-26-18,” (April 19, 2019), p. 2.
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